Long Island University Digital Commons @ LIU Faculty of Marketing & International Business College Of Management Publications 1-2017 The Rise of IT Services Clusters in India: A case of growth by replication Polavarapu M. Rao Long Island University, [email protected] M.H. Balasubrahmanya Indian Institute of Science, Bangalore Follow this and additional works at: http://digitalcommons.liu.edu/post_mrkibfpub Part of the Business Administration, Management, and Operations Commons Recommended Citation Rao, Polavarapu M. and Balasubrahmanya, M.H., "The Rise of IT Services Clusters in India: A case of growth by replication" (2017). Faculty of Marketing & International Business Publications. 2. http://digitalcommons.liu.edu/post_mrkibfpub/2 This Article is brought to you for free and open access by the College Of Management at Digital Commons @ LIU. It has been accepted for inclusion in Faculty of Marketing & International Business Publications by an authorized administrator of Digital Commons @ LIU. For more information, please contact [email protected]. Telecommunications Policy (xxxx) xxxx–xxxx Contents lists available at ScienceDirect Telecommunications Policy journal homepage: www.elsevier.com/locate/telpol The rise of IT services clusters in India: A case of growth by replication ⁎ P.M. Raoa, , M.H. Balasubrahmanyab a College of Management, Long Island University, Post Campus, Brookville, NY 11548, USA b Department of Management Studies, Indian Institute of Science, Bangalore, Karnataka, India ARTICLE INFO ABSTRACT Keywords: The Indian IT services sector has grown from small beginnings at the bottom of value creation to Indian IT clusters a major player in the global information and communications technology (ICT) industry. It MNC linkages commands a 55% share in the global market for IT services. India's IT sector value proposition in High-tech clusters terms of low cost with large supply of high quality talent is compelling. As a result, India has IT services exports become the premier choice not only for outsourcing IT services by the developed-world's Off-shoring of services multinational corporations (MNCs) but also for locating their own Global In-house Centers (GICs), which simultaneously compete and partner with local firms. This gave rise to six additional clusters beyond the earliest, largest and robust cluster, Bangalore. The paper provides a review of relevant literature; develops a conceptual framework for evaluation of clusters; and presents data and analysis with respect to relative size, growth, specialization, MNC presence and connectivity to local firms through expatriates and returning Indians, ,innovation; and discusses adequacy of ICT infrastructure for future growth. Although there are clear signs that the Indian IT sector has been moving towards a regime of providing high-end value added services, the sector's value proposition – lower cost combined with a large supply of high quality talent – remains the single most compelling reason for the rise and growth of multiple export clusters. Thus the sector's growth appears to be a case of growth by replication rather than innovation. The paper concludes that the Indian IT sector's value proposition in terms of lower cost combined with large supply of high quality talent remains the single most compelling reason for the rise and growth of multiple IT services export clusters. While the old adage, “people follow jobs” still holds for large part of the labor force, there is little doubt that the sprawling IT services clusters in India - with more to come from Tier II and Tier III cities – indicate, in fact, that “jobs follow talent." Both local firms and the MNCs, through their GICs, are pushing the boundaries of location farther and farther to continue to leverage cost advantage and available pools of talent. 1. Introduction Geographic concentration or agglomeration of certain industries, often referred to as clusters, has recently emerged as a key area of research in economics and business disciplines. While firms have obvious strategic interest in understanding the implications of clusters for locational decisions, it is of equal concern to policy makers who seek to understand how and why industrial clusters emerge and the implications of such agglomeration for building regional and national innovation systems for economic growth and ⁎ Corresponding author. E-mail address: [email protected] (P.M. Rao). http://dx.doi.org/10.1016/j.telpol.2016.11.006 Received 2 June 2016; Received in revised form 23 November 2016; Accepted 24 November 2016 0308-5961/ © 2016 Elsevier Ltd. All rights reserved. Please cite this article as: Rao, P.M., Telecommunications Policy (2016), http://dx.doi.org/10.1016/j.telpol.2016.11.006 P.M. Rao, M.H. Balasubrahmanya Telecommunications Policy (xxxx) xxxx–xxxx development. Recent research suggests that agglomeration facilitates economic development, in the developed as well as the developing world by stimulating regional growth that benefits the nation as a whole. Indeed, analysis of clusters has become an integral part of the new trade theory. The source of comparative advantage is often local arising from a concentration of economic activity offering opportunities to improve productivity through greater access to specialized inputs and information; fostering producers of complementary products; and improving the rate and success of innovation (Marshall, 1920; Krugman, 1991; Ellison and Glaeser, 1997; Porter, 1998, for example). Key factors in the evolution of these clusters of economic activity include demand conditions, polices of local, state and national governments, transportation and communications infrastructure, institutions of higher learning, availability of skilled labor force and credit, entrepreneurial talent, the role of multinational companies (MNCs) and last but not least chance occurrences or historical accidents (such as the case of IBM setting up a large industrial research laboratory in Toronto, Canada after being denied by Cambridge, England).A detailed survey of relevant literature on clusters is provided in Section 3. It is well established that the phenomenally rapid growth of information technology (IT) clusters over the past three decades has helped India become the world's leading exporter of IT services to the developed world in general and to the United States, in particular with important labor market implications for productivity, employment, wages, and innovation for India as well as the developed world. It is a topic of much discussion and heated debate among academics and policy makers alike in the US and other countries importing such services. A review of extant literature suggests that while there have been several case studies, focused mainly on Bangalore, few have attempted to throw light on the emergence of multiple horizontal IT services clusters - clusters separated by geography, state and local political boundaries, differences in infrastructure, educational institutions, availability of talent pool, complementary supporting industries and state and local government policies. And much of the research on IT clusters goes back to 2007 and earlier. Much has happened in the evolution of the nature, scope, and capabilities of Indian IT clusters since then, which raise a number of policy-related concerns and issues that provided the motivation for this paper. They include: the adequacy of ICT infrastructure to meet the current and future demand for IT services globally in the context of fourth Industrial revolution which, among other things, combines Internet of Things (IoT) and Internet of Services (IoS); the role of rapidly growing MNC led GICs – that compete and cooperate with the local firms - in the growth of more IT clusters in the country that go beyond being a supportive function; the role of IT clusters climbing up the value-chain through innovation to generate more and better jobs for the growing number of technical graduates in the country. Moreover, as Delgado, Porter, and Stern (2014) suggest, in the face of positive impact of clusters on regional development and industry performance, there is a growing need for cluster-based data for comparative analysis to aid policy makers and businesses alike. In addition, it is important to note at the outset that vast majority of theoretical and empirical literature on clusters has to do with industrial clusters. By contrast, this paper is about the growth of IT services clusters in India. The focus of this paper is on information technology (IT) clusters—particularly the software segment—that have emerged in seven Indian cities/regions starting with Bangalore followed by the National Capital Region (NCR) comprising New Delhi and its surrounding areas in three different states, Mumbai, Pune, Hyderabad, Chennai, and Kolkata. Particular focus will be on Bangalore, the largest IT cluster within what one might refer to as super cluster of high-technology firms spanning several industries—IT hardware, aerospace, machine tools, bio technology, and pharmaceuticals—and leading educational institutions. The rest of the paper is organized into five sections. Section 2 provides an overview of the Indian IT sector. In Section 3,we provide a survey of relevant literature and a conceptual framework to help understand the evolution of clusters. A brief profile of the seven clusters and a comparative analysis of their characteristics are provided in Section 4. Section 5 discusses the contribution of MNCs and Indian expatriates with connections to MNCs from US and other developed-countries